UDL CONTRACTING LTD v. APPLE DAILY PRINTING LTD AND ANOTHER

HCA 1209/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1209 OF 2007

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J U D G M E N T

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1.  Although this matter took an entire day to argue, the only question is one of costs.  There are two applications before me.  The first is an application by the 1^st defendant to set aside a default judgment entered against it on 27 June 2007.  The plaintiff agrees that that judgment should be set aside.  The second is also by the 1^st defendant, and it is for a stay of the proceedings pursuant to section 6 of the Arbitration Ordinance.  The plaintiff does not oppose the stay.

2.  I turn first to the application to set aside.  The plaintiff’s position here is that the default judgment was regular, and that the 1^st defendant, who seeks an indulgence from the court in setting aside a regular judgment, must bear the costs.  The 1^st defendant responds by three main arguments.  First, it asserts that the judgment was irregular, and it so asserts for three main reasons (a) that the writ has not been properly served on the 1^st defendant, (b) that the form of the judgment was irregular in that the indorsement of claim sought unliquidated damages, but the judgment entered was for a liquidated sum, and (c) there are also complaints about the form of the indorsement in that it is said to lack particulars and fails to state the basis upon which interest was claimed. Secondly, the 1^st defendant contends that even if the judgment was a regular one, the Court has a general discretion on costs and that where the party seeking to set aside a regular judgment is not at fault, it would be proper not to order costs against it, see Fok Chun Hung v Lo Yuk Shi [1995] 2 HKC 648 and Hong Kong Civil Procedure 2008 paras. 13/9/12 and 13/9/16.  Thirdly, the 1^st defendant relies on the authority of Lessy SARL v Pacific Star Development Ltd & another [1996] 2 HKLR 1 and contend that the Court should take into account the conduct of the parties and award what Mr Shieh calls a “truncated” order.

3.  The first question I have to consider is whether the judgment is  regular.  There are two sub-issues.  The first is one of service and the second is the form of the judgment and of the indorsement of claim.  The question of service is the most hotly contested issue in this application and I propose to consider this first.

4.  The 1^st defendant is a company registered under the Companies Ordinance.  Section 356 of that Ordinance permits service by “leaving it at…the registered office of the company”.  The question is whether this was done.

5.  The 1^st defendant’s registered office is at no. 8 Chun Ying Street, Tseung Kwan O Industrial Estate West, Tseung Kwan O, New Territories Hong Kong (“the registered office”).  The plaintiff’s evidence as to service consists of the affirmations of the process server, Madam Lo Lai Ching (“Lo”).  Lo is a clerk employed by the plaintiff’s solicitors.  She made 2 affirmations, the first is a short one in which she said she served the 1^st defendant with a true copy of the writ of summons in this action by leaving the same at the registered office on 8 June 2007.  In her second affirmation, she deposed that the above-mentioned address was actually a compound consisting of several buildings, a wide road surrounding the buildings and many car parking spaces at the periphery of the compound. The entrance to the compound had a gate, with a guard house on the side.  She was instructed to serve the writ on the 1^st defendant as well as on the 2^nd defendant.  As her instruction was to serve the 2^nd defendant personally, she waited outside the compound for the 2^nd defendant.  As far as service on the 1^st defendant was concerned, she was asked by the guard as to the reason for her attendance.  She said she told the guard that she was there to serve a document and that she came from a law firm.  She told the guard that the document was to be served on the 1^st defendant and there was no particular person in the company on whom the document was required to be served.  According to her, the guard refused to allow her to go into the building.  After waiting in vain for the 2^nd defendant to emerge, she was instructed to serve the writ on the 1^st defendant by leaving it at the address.  Lo said she took a few steps into the compound beyond the gate and put the writ on the floor immediately in front of the guard house.  She said that a guard was staring at her when she did so, but did not say anything to her.  The writ was sealed with the seal of the High Court.

6.  The 1^st defendant disputes that evidence.  The 1^st defendant relies on the affirmation of two security guards and of the recordings of the security video camera which captured the movements of Lo and the security guards that afternoon.  The security guards deny that Lo had said to either of them that she was there to serve a document or that she came from a law firm.  They also deny that she asked for or was refused entry into the building.  I have viewed the recordings and also have had the benefit of a summary of the images of the relevant portion of the recordings in an affidavit of Mr Rose, the 1^st defendant’s solicitor, as well as that produced by Mr Lee in his skeleton arguments.

7.  What is plain from the recording is that at about 16:11 hours on the day in question Lo threw a pile of papers over the security barrier and that that pile of paper landed somewhere outside the entrance of the guard house at the gate.  It is also plain from the recording that several minutes later (at about 16:18 hours) one of the guards came out of the guard house, picked up the pile of papers, flipped through them cursorily, and then threw them into a waste paper basket positioned next to the door of the guard house.  There is no dispute that the pile of papers is a copy of the writ and an acknowledgement of service.

8.   There is very little authority on what is required to comply with the requirement under section 356 to constitute the “leaving” of a document at the registered office of a company.  Mr Lee refers to two cases:  Lord Newborough v Jones [1975] Ch 90 and Venables v MGN Limited, unreported 2 December 1998.  Newborough was a case dealing with service under the Agricultural Holdings Act 1948, section 92 of which provides that any notice required under the Act shall be duly given to or served on the person if it is, inter alia, “left at his proper address”.  The notice to quit was served by the landlord by pushing it under the side door of the farmhouse which was the door most used by the tenant and his family.  There was no letter box either at the side door or the front door.  The evidence was that the notice was lodged beneath the linoleum and did not come to the attention of the tenant until several weeks later.  The service was held to be effective.  Russell LJ said (at p. 94F)

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I have formed the view that, the subject matter being a notice, it is implicit in the provisions of section 92 that, if served by leaving at the proper address of the person to be served, it must be left there in a proper way; that is to say, in a manner which a reasonable person, minded to bring the document to the attention of the person to whom the notice is addressed, would adopt.  This is, to my mind, the only qualification (or gloss, if you please) proper to be placed on the express language of the statutory provision.”

9.  This qualification was accepted by Mantell LJ to be applicable in Venables v MGN Ltd in the context of service under section 725 of the Companies Act 1985 which is identical to our section 356 of the Companies Ordinance.  Both parties accept what Russell LJ stated to be correctly representing the law.  I see no reason to disagree.

10.  The 1^st defendant made a number of submissions as to why it says Lo failed to leave the writ at the registered office in a proper way.  Mr Shieh submitted that in a case such as the present where the registered office is a large area within which there is a building, it would not be reasonable for the process server merely to leave the writ at the entrance of the compound or anywhere in the perimeter of the area.  He argued that common sense suggests that the office must be located within the building.  He said that follows from the use of the word “office”.  I do not accept this submission.  It is entirely up to the company what address it gives as its registered office. Section 92(1) of the Companies Ordinance provides

“	A company shall, as from the day on which it begins to carry on business or as from the 14th day after the date of its incorporation, whichever is the earlier, have a registered office in Hong Kong to which all communications and notices may be addressed.”

11.  Section 356 has already been alluded to.  This provides:

“	A document may be served on a company by leaving it at or sending it by post to the registered office of the company.”

12.  Whatever address a company chooses to name as its registered office, the effect of sections 92 and 356 is to make the place named as the place where documents can be served on the company by leaving the document at that location.  A company which chooses to give a number on a street instead of say, a specific room in a building, cannot be heard to complain if the document is left at the entrance to the place designated by the given address.  Mr Shieh’s argument, if accepted, would have the effect of requiring a process server to look for a location within the place given as being a place where the functions of an office are carried out.  That cannot be right.

13.  It is further submitted that what Lo did was in the circumstances unreasonable.  Mr Shieh submitted that she should have handed the document to the guard or at least have informed the guard that she was serving a document.  I have already mentioned that there is a conflict of evidence as to what was or was not said by Lo to the guards.  The normal rule, as stated by the Privy Council in Tay Bok Choon v Tahansan Sdn. Bhd. [1987] 1 WLR 413 at 419A and  Silver Mountain Investment Ltd v Attorney General [1994] 1 WLR 925 at 934F, is that where allegations are made in affidavits and those allegations are credibly denied, then in the absence of oral evidence or cross-examination, the judge must decide the matter by consideration of the undisputed facts.  Although I agree with Mr Lee that in the circumstances of the present case, the Court can readily understand why the parties would not wish to spend any further costs on cross-examination or oral evidence, the position in law still remains that I can only take account of the undisputed evidence or facts.  I apprehend the rule enunciated by the Privy Council to apply irrespective of whether there is a good reason for not cross-examining a witness.  I do not draw any adverse inference against either party in not requiring deponents on the other side to give evidence or be cross-examined.

14.  The question I have to consider is whether what Lo did was proper in the sense explained by Russell LJ in Newborough.  The law does not impose on the process server an obligation to do all that is reasonable for the purpose of bringing the writ to the attention of the defendant (cf rule 46 of the Bankruptcy Rules as to service of the statutory demand in cases where personal service is impracticable).  The undisputed facts of the case do not suggest to me that what Lo did was unreasonable in seeking to bring the attention of the writ to the 1^st defendant.  Lo did leave the writ at the entrance of the registered office, which is the place where a reasonable person, minded to bring the document to the attention of the 1^st defendant, would have left it.  Indeed, as was pointed out during argument, the writ did come to the attention of the security guard employed by the 1^st defendant to man the gate.  The fact that the security guard happened to discard the document is fortuitous and could not be attributed to Lo’s actions.  It seems to me to be beside the point that the guard who did so may not be able to understand English.  Instead of throwing the documents away, the guard could have taken the document to some one who reads English.  The guidance enunciated by Russell LJ is eminent common sense in requiring a document to be left properly.  It is not intended as foolproof that the recipient would deal with the document in a proper manner.

15.  The 1^st defendant poured some scorn on the manner in which Lo conducted herself.  She is said to have walked quickly both before and after throwing the pile of papers beyond the barrier.  This may suggest that she did not want to bring attention to herself.  She is also criticized her for giving a version (taking a few steps into the compound beyond the gate and putting the pile of writ on the ground) which is not borne out by the recording (which shows she threw the pile of papers from outside the gate).  In my view, neither of these matters affects the position.  She did leave the writ at the registered office, and unless there is evidence (and none is suggested) to show that she did so in a way calculated to advert attention from the document (as opposed to herself), I do not think her conduct bears on the matter.

16.  I turn to the question whether the judgment is regular in form.  I have no doubt that it is not.  The claim indorsed on the writ is for damages, not for a liquidated sum.  The fact that those damages were particularized does not entitle the plaintiff to enter judgment for a sum.  Quite plainly, that judgment was irregular, and must on that ground, be set aside.  The evidence shows that the plaintiff elected to enter judgment in this form.  I accept the 1^st defendant’s submission that this is not a mere slip which can be corrected under the slip rule.  Although the 1^st defendant did not specifically rely on this ground in its summons, it was mentioned in the supporting affirmation and I would set aside the judgment on this ground.  Since the judgment is irregular and must be set aside on this ground, it is unnecessary for the 1^st defendant to rely on the other complaints as to the form of the indorsement.  In my view, these are insignificant and would not justify the setting aside of the judgment.

17.  Since the judgment was irregular, the 1^st defendant was entitled to set it aside as of right, rather than as a matter of indulgence.  Although it has not succeeded on the service point, I see no reason why the 1^st defendant should bear the costs of the entering of the judgment or the costs of the application to set aside.  Instead, the 1^st defendant is prima facie entitled to the costs of setting aside the default judgment.

18.  It is in the circumstances unnecessary to consider Mr Shieh’s argument that even if the judgment is regular, the Court should nevertheless exercise its discretion not to order costs against the 1^st defendant on the ground that the 1^st defendant is not to be blamed for not having received actual notice of the writ.

19.  I come to the 1^st defendant’s third argument.  In my view, by the time the 1^st defendant made its application to set aside on 29 June 2007, the plaintiff ought to have conceded the merits of that application.  In my judgment, this is a case where the plaintiff was plainly aware that the 1^st defendant has a defence to the action.  I accept Mr Shieh’s submissions that as from then on, the plaintiff should bear the risk of further costs incurred in setting aside the default judgment.

20.  Accordingly, subject to one point, the order I propose to make is that the plaintiff should not be awarded the costs of entering judgment, but that the costs of the application to set aside should be to the 1^st defendant.  The remaining point is whether it would be appropriate to deprive the 1^st defendant of the whole or part of their costs by reason of the fact that a great deal of the application (both in terms of the evidence as well as the argument) was focused on the question of the regularity of service, and the 1^st defendant has failed on that issue.  In In re Elgindata Ltd (No. 2) [1992] 1 WLR 1207 at 1214, Nourse LJ set out the principles to guide the court on costs, one of which is that the general rule that costs follow the event does not cease to apply simply because the successful party raises issues or makes allegations on which he fails, but where that has caused a significant increase in the length or cost of the proceedings he may be deprived of the whole or a part of his costs.  I am satisfied that this applies in the present case and that it would be appropriate to award the 1^st defendant only 20% of the costs of the application to set aside the default judgment.

21.  I turn next to the application for stay.  Mr Lee for the plaintiff argued that the cause of action now pleaded in the statement of claim against the 1^st defendant falls outside the scope of the arbitration clause.  Its concession that there should be a stay should not be seen as a concession that the 1^st defendant was entitled to a stay.  Mr Lee asks me to make no order as to costs on this application.  Mr Shieh submitted that since the plaintiff now concedes the summons, it should be ordered to bear the costs.  He further submitted that in any event, the relevant clause in the contract (which is article 6) is wide enough to cover the dispute.  Article 6 is in these terms:

“

If any dispute or difference as to the construction of this contract or any matter or thing of whatsoever nature arising hereunder or in connection therewith shall arise between the Employer and the Contractor either during the progress or after the completion or abandonment of the Works it shall be and is hereby referred to method referred for settlement of disputes in accordance with clause 39.”

22.  Clause 39 provides for mediation and arbitration.

23.  In dealing with this argument, it is necessary to review, if only in very broad outline, the nature of the claim as pleaded in the statement of claim and how that arises.  The claim pleaded against the 1^st defendant in this action is for damages for misrepresentation and damages for breach of collateral warranties.  These are alleged to arise in this way.  The plaintiff as contractor and the 1^st defendant as employer entered into a building contract for the design and construction of a printing workshop and support offices.  It is alleged that the 1^st defendant had made numerous changes to the employer’s requirements which led to considerable amount of additional works, and consequential delay and costs.  It is said that there was consistent delay in payment under the procedure stipulated in the contract.  However, the 1^st and 2^nd defendants were eager to move into the buildings in stages.  It is alleged that in about May 1997, the 2^nd defendant made certain representations to the plaintiff’s then chairman and that in January 1998, the plaintiff and the 1^st and 2^nd defendants reached an interim agreement to resolve the then pressing problems and address the concerns of the defendants for an early occupation of the buildings.  This agreement is said to be oral and was said to be induced by certain representations by the 1^st and 2^nd defendants.  Under this agreement, the plaintiff agreed to evacuate all its subcontractors from the site by a certain time and undertook to complete all outstanding works and rectify all defects and assign the suppliers’ and subcontractors’ warranties to the 1^st defendant.  The 1^st defendant was allowed to employ its own contractors to complete any outstanding works and rectify any defects and omissions.  The representations said to be made were that the 1^st defendant would give fair treatment to the plaintiff, that there would be no delay in the valuation process, and that payments would be made promptly, and the 1^st defendant would allow the plaintiff the right of access to the site to carry out rectification works after the handover.  The representations are alleged to be false in that, so it is said, the 1^st defendant failed to certify and make payment in respect of certain interim payment despite the recommendation of the Quantity Surveyor, and repeatedly failed or refused to gain access to the project site to the plaintiff to allow the plaintiff to carry out inspection and/or rectification in respect of works; that the 1^st defendant called upon a performance bond and did not even allow the plaintiff to carry out outstanding works under the building contracts.

24.  My attention was drawn to a recent decision of the House of Lords, Premium Nafta Products Limited v Fili Shipping Company Limited [2007] UKHL 40.  The question there was whether the claim that the charterparties were procured by bribery comes within the scope of an arbitration clause in the Shelltime 4 form.  The relevant words of the clause were: “any dispute arising under this charter shall be decided by the English courts…”

25.  Lord Hoffmann pointed out that the correct approach to construction is to bear in mind the purpose of the arbitration clause.  The parties have entered into an agreement which may give rise to disputes.  They want those disputes decided by a tribunal which they have chosen.  That being the purpose, the construction of the arbitration clause must be influenced by whether the parties, as rational businessmen, were likely to have intended that only some of the questions arising out of their relationship were to be submitted to arbitration and others were to be decided by national courts.  He reasoned:

“

Could they have intended that the question of whether the contract was repudiated should be decided by arbitration but the question of whether it was induced by misrepresentation should be decided by a court? If, as appears to be generally accepted, there is no rational basis upon which businessmen would be likely to wish to have questions of the validity or enforceability of the contract decided by one tribunal and questions about its performance decided by another, one would need to find very clear language before deciding that they must have had such an intention.”

26.  In the course of his judgment, Lord Hoffmann reviewed the authorities which drew a distinction between the expression “arising under” and “arising out of”.  He applauded the opinion expressed by Longmore LJ in the Court of Appeal that a fresh start should be made and held that the construction of an arbitration clause should start from the assumption that the parties, as rational businessmen, are likely to have intended any dispute arising out of the relationship into which they have entered or purported to enter to be decided by the same tribunal.  The clause, he held, should be construed in accordance with this presumption unless the language makes it clear that certain questions were intended to be excluded from the arbitrator’s jurisdiction.

27.  In the present case, the claim is predicated on certain oral agreements and representation which plainly arose “out of” or “under” the contract of contractor and employer – and, on the authority of Premium Nafta Products Limited v Fili Shipping Company Limited, I draw no distinction between the two expressions used.   In A & B v C & D [1982] 1 Lloyd’s Rep 166, the Court of Appeal held that the words “in connection with the contract” covered disputes arising from a second contract which related to the original contract which contained the arbitration clause.   In my judgment, the claims pleaded in the statement of claim against the 1^st defendant do fall within the scope of the arbitration clause.

28.  In all the circumstances, the proper order as to costs on the application for stay is that the 1^st defendant should have the costs of that application.   I have not overlooked the other points advanced in Mr Lee’s submissions which he did not develop orally as to the need under clause 39 that there should first be mediation before the 1^st defendant can invoke the arbitration procedure, or the argument on waiver.   I do not find merit in either of them.   I agree with Mr Shieh that there has been no waiver, and that both parties have by their conduct indicated unequivocally that neither wished to embark upon mediation.

29.  In the premises, I order that the judgment of 27 June 2007 be set aside on the ground that the judgment was irregular.  The plaintiff shall pay to the 1^st defendant 20% of its costs of and occasioned by the application to set aside the default judgment.  I also order that all proceedings against the 1^st defendant herein be stayed pursuant to section 6 of the Arbitration Ordinance and that the plaintiff do pay the 1^st defendant the costs of and occasioned by this action including the costs of the stay application, to be taxed if not agreed.